Seeking the Higher Reward

The SPDR S&P 500 (SPY) premarket trading may have caused a few hearts to skip a beat as the "breakdown" looked to be on the horizon. Since the open, it has been a straight climb higher into resistance. I've seen several notes taking the position that this action is bullish because it is holding the lows. I'm not so sure. It looks like we are just digesting this move lower and potentially creating a bear flag here. I am watching the $137.60 and $139 levels. I'll become a bit more optimistic if it gets close over $139 and maintains this turn high in the Relative Strength Indicator. The SPY would trigger a buy from me on the move over $139, the strengthening RSI and a move over 20 on the stochastics. Until then, I am in wait-and-watch mode. A close under $137.60 still sets us up for $131. Technically speaking, there is a greater chance of a move to $131 from here as opposed to a push to $142. In other words, I believe the higher-reward trade, the short side, is also the higher-probability trade. Either side has provided solid areas where a trader can set stops without risking too much, so if you have conviction, you have definition, which makes for an attractive trade on that conviction.

SPDR S&P 500 (SPY) Source: View Chart » View in New Window »

On the other side of the SPY trade sits the iShares Barclays 20+ Year Treasury Bond Fund (TLT). Beyond Apple (AAPL), TLT may be the most talked about name on this site. The thesis always seems to be a short-side thesis, so I will constantly look for a short-term, short-side trade. The key there is short term. The longer-term short still doesn't seem to be on the table. The main trade thesis I follow for a short-side trade via puts is the third Bollinger band touch trade. Whenever TLT hits the third Bollinger band on the upside, I will enter in-the-money puts and look to sell them in the next one to three days. We've been riding the second Bollinger band higher, but haven't sniffed the third Bollinger band here the last three days. We were very close four days ago, but just came up a few pennies short. One other approach could work here for those looking for a short-side entry using the stochastics. When stochastics enter the overbought area (above 80), wait for the black line to cross under the red, and go short TLT. Then, look to cover the trade within the next three days. The quick trade has worked the last five times it has occurred. The odds of success drop a bit if holding the trade longer (four out of five times it had success), but the upside of those successes was significantly higher than the quick trade. The hold time there would be about three weeks. The "unsuccessful" trade was breakeven, so that is one failure I could live with if it happened again....16 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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